Monday, July 11, 2011

Cutting spending will cut jobs

Since Obama took office: government payrolls -- federal, state, and local -- have declined by 500,000. Reducing government spending at the levels requested by Republicans will result in hundreds of thousands of additional job cuts. The newly unemployed will be entering a job market where opportunities are scarce to nonexistent. The subtraction of their paychecks will place a further drag on the economy....Andrew Leonard, Salon

Posted at 10:01:24 AM

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If we went around breaking windows, think of how many jobs we'd create!

Leonard doesn't get that a dollar spent by the private sector generally produces more economic benefit than a dollar spent by the government. Of course there will be short term jobs lost, but in the long run those people will be better deployed in the private sector.

It is no secret that liberals think spending on government jobs is good for the economy. They give less thought to where the money comes from and the effect of taxation on the economy. They pay zero attention to managing the spending. In their blind solidarity with the unions and "collective bargaining," they basically give the employees as much as they can get away with short of causing a taxpayer rebellion. That's how you get to a 35-hour work week and overtime at the beginning of a shift and retirement in the mid 50s. That's how you get Quinn making a ridiculous promise to the union. The cost of government labor has just soared. Because the jobs are so expensive, layoffs occur--often because the union refuses to budge one inch when the rest of us are facing all kinds of reductions. In Camden, NJ, which is broke, the police union refused to concede anything, so a large number of cops were laid off. In Oregon, the Democratic governmor is begging the unions to pay even a small sum toward their health insurance; they pay zero. In Wisconsin, Scott Walker got the employees to make modest contributions to their insurance and pensions. Some schools have already seen a striking turnaround, with more money to hire more teachers. Now that's good for the economy.

"Of course there will be short term jobs lost, but in the long run those people will be better deployed in the private sector."

Really? When do you see this happening? Better deployed? Like working for health insurers with massive administrative costs but remarkably bad service? Of course, many of those jobs may be off-shored as well. Cheaper, cheaper, more profits for big companies paying little to no taxes and it makes more of that taxed at 15% money for hedge fund managers too. Winwinwin, if you live in an alternate trickle down universe.

Cutting jobs in the midst of a recession with nagging high unemployment, while corporations are sitting on large cash stockpiles. Huh. Not the way I'd have gone with this.

A private sector job is based on an economic need (or at least an econominc argument). A government or public sector job, however, often requires no such justification.

We always hear about how we would have to cut "first responders" and other critical employees, but never hear how the bureaucrats may have to cut a few staffers. Let's face it...there are many, many thousands of government jobs that are not necessary.

Now whether we can/should cut those jobs immediately on a massive scale is another issue. It's almost like welfare--those make-work jobs may help prevent society from coming apart at the seams. In other words, I tolerate a certain level of welfare and a certain level of government waste in exchange for not having to carry a gun around and worry (as much) that some desperate person will attack me.

--"Better deployed" meaning it is more efficient for the overall economy to deploy workers in the private sector where they create value vs. in a government job that often adds little value and just transfers $ from the taxpayer's pocket to the employee's pocket.

Corporations only hire employees if they will create more $ than they cost. The government is obviously different.

ZORN REPLY -- There's something quite rich, though, about the GOP howling about unemployment numbers that are growing because of policies they are expressly advocating.

Of course, government employees don't live anywhere, eat anything, and they must walk around naked (because of course they don't buy a car or gas), and consume no other goods & services. so I guess it depends on what you mean by "adding little value". And please don't gripe when you have to wait in line at some office (license plates, etc) because there aren't enough workers for the # of people in line, and don't you dare complain about potholes or snow removal or anything like that! Or if your child's school has 35-40 kids in a classroom & no arts or sports. I'm not saying that in some cases there are more employees than needed, but rather than pay unemployment or welfare......

Remember, a government, especially the federal govt, is NOT a corporation. I remember way back in grad school when I took a finance class related to government learning that deficit financing is the way a govt generates jobs & growth. And we "spent" ourselves out of most recessions in the past. Like the CCC in the Depression.

Also,I understand maybe a tax break directed to an actual job creator will create jobs. But the real job creator is consumption, and if people like the average govt worker have money to spend, they will spend it on goods & services & then there will be jobs to make those things & provide those services. I read recently that some mfg is moving back here now because China (for instance) is paying higher wages & with the cost of shipping and all it's starting to become cheaper to make it here. Finally, how many jobs does a hedge fund manager create?

LizH asked:
"Finally, how many jobs does a hedge fund manager create?"

Well, the company he works for likely employs many clerks, programmers, etc. And he is likely paying hundreds of thousands in taxes. And the boat he buys helps employ the boatbuilders, etc. (which goes to one of your points about consumption).

Yet, keeping taxes low, cutting them even more is good for the economy, creates jobs, right? After 10 years of Bush tax cuts, why is unemployment so high?

I was watching Morning Joe, before the storm destroyed my neighborhood, and it was pointed out that after the tax cuts and subsequent wars, the deficit took off. If these two events hadn't happened, we'd actually have a surplus right now.

Obama's gone all in, will the Republicans call his bluff? Will they continue to protect Defense, the wealthy? If not, if they continue to be anti-revenue no matter what, they'll blow their "deficit reduction is our most important goal" position. Tax cuts for the obscenely wealthy is more important?

BTW, they don't care that the deficit reductions they want will result in massive job losses. Hey, Obama's president right now, his fault when it happens.

As many commenters have pointed out, Leonard's argument is unserious because, yes, government workers are an economic cost not an economic asset. He writes "The subtraction of their paychecks will place a further drag on the economy." That's proof that he needs a basic economics lesson. We would be better off paying unemployment to unnecessary government workers because those benefits are less than their salaries + benefits.

Where are the private sector jobs? Well, tax lawyers like myself are forced to advise companies to send jobs overseas because we can't seem to convince our leaders that a corporate tax cut is necessary to make our country economically competitive (it's an open question about whether sending functions overseas really reduces net employment but that's a much longer discussion). I feel terrible for anyone who loses his job, even a government worker, but we need to be realistic about the size of government that we can afford. The best solution would be to reduce government payrolls while repealing anti-competitive regulations and reducing the corporate tax burden.

Law of un-intended consequences.... (well my prediction, anyway of it's application here), some of these workers will start their own little consulting companies and get hired to do the same things they did before but at higher prices than their former salaries were, even when accounting for benefits.

Respectfully, your argument about government workers' contributions to the economy makes no economic sense. Let me help you understand this. The maximum marginal economic contribution that could be made by a government worker is derived from his disposable income. When his disposable income comes entirely from taxpayer dollars, the cost will always exceed the benefit (that's just how the math works).

Your argument about the need for basic government services is correct but most of those are handled on the state and/or local level. I'm not sure that basic services are really the target of these cuts. In fact, if you think about it, those are the areas where politicians would have the least incentive to cut because they are the most noticeable services. We should target the bureaucracy, administrative staff, and highly-compensated employees first. States that have been responsible about spending (e.g., Texas, Utah) have no problem. Other states that have been less responsible have more to worry about. Solution: if this concerns you move to a state with more responsible spending policies and more economic freedom.

Regarding your third paragraph, whomever taught that class has no understanding of what causes recessions and failed to learn the lesson of the Great Depression. Spend your way out a depression? That's not realistic because that spending has to come from somewhere - either taxes or debt both of which are a drag on the economy. It's all about responsible spending and stable money growth, enabling businesses to be competitive, and resisting the tendency to overregulate.

Regarding your fourth paragraph, I don't think you are thinking through the economics of what you are suggesting. First, corporate tax cuts create jobs which create consumption. If you are giving government workers money (a salary + benefits) then how can it create an economic benefit if the maximum that they can spend is only some fraction of what the taxpayers are giving them in the first place? That is mathematically illogical as I pointed out above.

You make a good point about China. All things being equal, employers would much rather manufacture here than in China (for a variety of reasons) so they are extremely sensitive to cost changes there. I discourage clients from going there unless they are going to see a big benefit.

As to your hedge fund manager question, Brian and Ralphie are 100% correct. They are some of the biggest job creators in the country. Thanks for pointing that out.

@Jen,

The reason that health insurers have massive administrative costs is due to overregulation and excessive government interference not because the industry is made up of inefficient providers.

Also, keep in mind that there are very few big companies that pay no taxes. What happens is that we have a tax system that is designed to promote certain behavior rather than apply a fair rate to everyone. Some corporations are able to reduce their taxes by taking advantage of the opportunities offered by the government. Economic conservatives do not favor special tax breaks because it amounts to the government picking winners and losers.

"we can't seem to convince our leaders that a corporate tax cut is necessary to make our country economically competitive"

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But the Center for Tax Justice (CTJ) has crunched the most recent data from the Organization for Economic Cooperation and Development (OECD), the Office of Management and Budget, and the Census Bureau, and finds that “the U.S. is already one of the least taxed countries for corporations in the developed world.”

As a share of GDP, the U.S. had the second lowest tax rate, behind only Iceland. This statistic flips on its head the often-repeated Republican charge that America has the second highest corporate tax rate in the world (which is only true on paper). In 2009, U.S. corporate taxes had fallen to only 1.3 percent of GDP, from 4 percent in 1965.

Good question. The reason is that the structural corporate rate is too high. Individual tax cuts are good and politically popular but they don't greatly influence corporate behavior. We could reduce the rate in a revenue-neutral manner by eliminating special tax breaks. That doesn't include, for example, depreciation on corporate aircraft because the depreciation rules for that asset are the same as for other assets. Don't be confused by that talking point. What we need to target are special deductions and other rules targeted at certain industries and certain processes. Some rules are even in place to benefit a small number of companies. That's bad tax policy and results in anti-competitive behavior.

By the way, this idea of protecting the wealthy is so much nonsense. If you raise taxes at the top, they take it out on everybody else. We've been over that before. The wealthy don't actually pay tax increases; they hire people like me to pass the burden on to people like you and me (wait a minute, ... why am I doing that to myself?). When you talk about massive job losses, keep in mind you are only talking about government jobs, which are a drag on the economy anyway, as I pointed out to LizH.

I love this myth that all private-sector jobs are economically rational and provide more value than they cost. No one ever gets hired because he/she is related to or sleeping with a decision maker. There is a well-functioning free market in CEOs that sets compensation efficiently. Shareholders have real power to evaluate management and make changes when they are dissatisfied. Defense contracts are distributed across congressional districts according to best current use of taxpayer dollars. Companies that make bad decisions or take risks that turn out badly suffer the consequences of the free market, regardless of size or entanglement with other institutions.

I am not going to pretend to have a strong ability to predict whether the stimulus effect of some jobs -- whether public or private -- that might not be otherwise justified might make sense during a period of high unemployment. That seems to be a topic of sincere disagreement even among professional economists. I will say that it gets harder to support in environments where government debts are already so high. By the way, so do lower (vs. Kennedy, Reagan, Clinton, whatever era) tax rates for the wealthy which are also, at best, of questionable value for stimulating job creation.

Finally, although I realize this is directed at no one who will actually read this comment, a suggestion for the Chicago Tribune. How about showing a little humility in giving advice to the government about managing its finances until you have paid all your creditors in full?

"ZORN REPLY -- There's something quite rich, though, about the GOP howling about unemployment numbers that are growing because of policies they are expressly advocating."

I don't care how much "howling" or "bleating" or other gasbagging politicians of either party do as long as they start being more responsible with our money. Finding examples of politicians being hypocritical or for changing their position on an issue is pretty easy. They all have made me highly cynical about the future of our state and country.

No one would seriously argue that all private sector jobs are economically rational -- I'm sure there is a layer of fat that could be trimmed at Goldman Sachs and even Apple. But it is the company and its shareholders that bear responsibility for those mistakes, not the taxpayer.

(I know people will bring up bailouts of Wall Street and automakers--but those are rare and I don't condone them.)

I could go on and on about the Citizens for Tax Justice (NB, it's "Citizens" not "Center") but I'll attack the message instead of the partisan messenger (whose members are tax advisors who can't find lucrative jobs, as far as I can tell).

First of all,the CTJ is not talking about a tax rate; it's talking about tax revenues. How can you compare a tax rate to a number like GDP? It doesn't make sense because the nominal rate stays constant no matter what GDP is. I'm not just being picky with you; it raises a point that I'll get to in a minute.

The CTJ decided to go the tax revenue vs. GDP angle for a very good reason - because it knows that the tax code is loaded with special goodies for established corporations who know how to play the system. Create a few green jobs here, get your tax adviser to figure out how to call what you are doing "manufacturing" over here, and all of a sudden your effective tax rate is pretty low. Can't find a break? Well, then send that division to Singapore or Ireland or even Canada. Nice game right? I guess, but if you are not in a favored industry or are not a favored company, you don't get to play. Also, what's more economically beneficial, lowering your rate by meeting requirements imposed by the government or doing what you do best to make money for shareholders, earn higher profits, and expand? You know the answer there. What these companies pay my firm to figure this out for them and comply with all the rules and regulations is obscene; the lost efficiency from letting tax be a decision driver is even more obscene.

So the reason why tax revenues are a low percentage of GDP is that companies are able to take advantage of myriad special deductions and other beneficial rules. So what? Again, the problem is that these rules are written with specific objectives and sometimes specific companies in mind. When a company like Boeing wants to reduce its effective tax rate, it can hire someone like me to find a special tax break that its own tax department hasn't thought of, or it can lobby a congressman to make a change. The downside is that it's great for Boeing and existing companies but very bad for new companies and foreign companies who want to put jobs on American soil. Those companies are starting from scratch and, believe me, they care a lot about the nominal corporate rate. Oh, by the way, these companies are the ones who create most of the new jobs - it's not the GEs and the Boeings and the Caterpillars.

That's why the right answer is a cut in the rate balanced by shutting down these stupid loopholes. Don't worry about me (I know you were) because I do well any time there is a change regardless of whether that change is beneficial to taxpayers or not. The CTJ spotted a problem but because of its agenda, it didn't tell you the whole story. I know the story because I deal with it every day.

Who in the world came up with the idea that all or even most private sector jobs are economically rational? That's clearly not the case. My personal rule-of-thumb is that the larger a company is, the closer it is to being run like the government. The difference is that when a company is run inefficiently, it only punishes the shareholders of that company; when the government creates inefficient jobs, it's the taxpayers who are punished.

Of course, JL, nobody ever got hired in the public sector because they were related to or sleeping with a decision maker, were they? I suppose that the first Mayor Daley putting his arms around his children (and if you didn't like it, there was a mistletoe hanging from his coattail), Todd Stroger's and Joe Berrios's Friends and Family hiring plans, or Wayne Hays fishing in the secretarial pool, that he had previously stocked (Wayne Hays job interview: "Show me your [breasts]." "Nice. You're hired.") were just aberrations.

There's probably a lot more of that sort of thing in the public sector than in the private, where people hired have to actually pull their weight.

I don't know, I worked for a couple of companies (private) where the upper management were all related (the kids, mostly), one where the family/upper mgmt all parked their Mercedes, etc in the parking lot but couldn't manage to give more than a few % raise per year. And we did all the work (the "VPs" showed up when they wanted & spent most of their time on personal stuff)! Now I work for a large company where there are relatives hired, but not usually in mgmt positions unless they earned them, and anyway there are many employees so that % of mgmt is pretty low. My point is that it happens everywhere, private & public sectors.

--Oh yeah, the current company I work for is a health insurer. Our admin costs are 15% of premiums. Which is the amount mandated by the govt in HCR. Some other companies are at more like 30% or so. They will also have to be at 15% soon.

As usual, GregJ rules over the conversational battlefield. The fact is that the all-in tax rate on corporate income is unforgiveably high: 35% plus 35% at the personal level plus state taxes. Unbelievable.

Looks like Obama is still holding tough on shared sacrifice, will Boehner cave to the tax loopholes closures the Democrats are demanding? Or will he try to save his position as Speaker of the House by threatening the debt ceiling? Any minute now, I expect him to start crying.

By the way, Greg, if the wealthy plan to pass along tax increases to the rest of us, why should any conservative have a problem with this? After all, you admit you'll personally benefit?

Paul - I will grant that the Tribune does a good job of keeping the business side separate from the editorial aide. Every company does have creditors, as you say. Most pay them back. Probably especially if the product they sell depends on a reputation for integrity. That distinction between business and editorial matters buy it is not absolute.

Greg J and others - I was just addressing this idea that all private-sector jobs produce a net economic plus. As to shareholders and taxpayers, I do not think they are so different. They are basically the owners and have the right to set direction. One major difference is that this is a real power in government and largely fictional for most people in the private sector.

MCN - That 35% is a fictional number, is it not? What is actual federal corporate tax revenue divided by actual corporate profits -- realizing both numbers, especially revenue, are a matter of definition?

Another excellent question. First, let me assure you that the wealthy don't merely plan to pass tax increases along to the rest of us, they do it.

The reason that it's a bad thing is that it's not the best use of talent or resources, and it's unfair to many businesses. Apple is good at making gadgets that many people like. Every minute that Apple spends complying with tax laws, it is not focusing on what it does best. Sure, Apple has clever lawyers, lobbyists, and accountants but scheming to avoid taxes is not what the company is in business for. If we had a lower corporate tax rate, Apple wouldn't be as interested in tax planning or dealing with overseas competition - it would be focused on growing its business (more profits, more jobs).

And what about Apple's new start up competitor who can't afford the fancy lawyers and accountants, and certainly can't influence legislation? How is it fair that the tax system is favoring the bigger companies? What about foreign businesses who would love to enter our market and hire our people but don't consider it worth the effort or cost?

But you might argue that companies will still try to avoid taxes if we lower the rate. That's only true some of the time. Most tax savings ideas come from someone like me saying "I will save you $1 million if you agree to pay me $100,000" or some such. That sounds like a good idea but what if we lower the rate and that idea is only worth $700,000? It seems like the company is still getting a deal but the opportunity cost (how much time Apple management has to spend dealing with me, changing its business to adapt to my tax plan, etc.) may actually be too high. If we simultaneously lower the tax rate and simplify the code to take away special breaks for certain companies, we get a more globally competitive and fair tax system. No matter what it could still be manipulated to some extent but companies would have less incentive to spend time avoiding taxes because of opportunity costs.

Now we come to the most important thing - if this actually comes to pass, what happens to ME? By the time we would ever get around to implementing any kind of tax overhaul like I described, I'll be happy to move to Costa Rica, open a bar along the beach, and live happily ever after with a couple of exotic, young "special friends" by my side. I will check in here periodically to remind Eric that his bright idea to amend the Constitution to allow non-natural born citizens to become president is at least partly responsible for bringing us the Bieber administration.

ZORN REPLY -- I'm not wholly persuaded by you "gee, if you just lower the tax rates we'll stop trying every trick in the book to avoid our taxes." Rational businesses as rational actors will spent $500 to make $550 every time. And the idea that if we just "simplify the code" --as if that's easy and magic and obvious -- companies won't keep looking for ways around paying taxes is uncharacteristically naive for you, Greg. It reminds me of those who promote a "simple, flat income tax," as though a simple tax is necessarily flat or a flat tax is necessarily simple.
If I actually believed that you were looking for the golden mean -- that level and style of taxation that balanced economic growth with the provision of safety nets and other services befitting a nation of our ideals and wealth, I might be with with you. I don't believe that, though. I've heard too many conservatives parrot the thought that they want to get government so small they can drown it in the bathtub. I happen to think a well managed government should be and even needs to be substantial in order to cushion the blows administered by the roller-coaster ride of free-market capitalism; that the conservative economic vision is, at the margins, dystopian.
No, the poor will not be better off if we leave it to business and industry to set all our standards for wages, workplace safety, the environment and so on.
On one of the threads today MCN was crowing about how much better the poor have it now than they did in 1911. No duh. This past century has been massively, heroically, strongly liberal and progressive by the standards of history. George Will has openly expressed the desire to drag this nation back to the early 20th century. I cannot join him in that desire.

I've read every word of every person's arguments and rationales and -- Greg J. -- you take the prize! You win! First of all, all through this you have waxed intellectual and informative, and knowledgable. And second of all -- your last paragraph was perfect. Just perfect.

You most definitely win. Sadly, I don't think America will, because those in charge aren't as smart as you.

Greg J. did a terrific job indeed of exposing common and unfortunately persistent economic fallacies.

One might add is that taxation is not the only way government transfers money from one use to another. (The direction of such transfers is on average from more productive uses to less productive, not because of malfeasance, but because of the information problem - a technocracy can not allocate resources as well as free market prices.) Inflation (or dampening of deflation) is another and it is practiced by the U.S. government on a grand scale. Regulations/mandates to the private sector is yet another one. The total burden of government is government spending plus the cost unfunded mandates.

Lastly, consumption is not the driver of increased standard of living, production is. For me to consume I either have to produce that something myself or exchange something that I produced [via the intermediate step of money] for what I want to consume.

“the U.S. is already one of the least taxed countries for corporations in the developed world.”

As Greg J has already explained, tax revenues are completely different from tax rates. Liberals point to the fact that tax revenues as a percentage of GDP are at a historic low and they mistakenly think this means tax RATES must also be at a historic low. However, this is not true. In the 1980's, Reagan lowered the top tax rate to 28%. That was the lowest it has been in any of our lifetimes. Since Reagan's time, the top rate has crept up to 35%. Any way you slice it, 35% is higher than 28%.

Liberals simply cannot understand why the government is collecting less revenue with a top tax rate of 35% than it did when it was only 28%. And what is their solution to the reduction in tax receipts? They want to raise the top rate even higher!

---Even supposing it was true - the issue, as I mentioned before, is total government spending plus unfunded mandates/regulation, not just taxes, and the burned of the U.S. government on the economy was one of the lightest (compared to others or historically), it doesn't follow that it is best left alone or made bigger (which is the current course.)

Thanks so much for the compliments. To be honest, it's not that I'm smarter than anyone else, but I have worked in this field (international tax and tax policy) for quite a while. The problem with our leadership is that it's hard to sell a corporate tax cut to the public and it's hard to sell loophole closers to corporations who donate to your campaign. As I remind my liberal friends from time to time, there is nothing inherently conservative about big business or its supporters; big business is only out for itself.

ZORN REPLY -- I'm not wholly persuaded by you "gee, if you just lower the tax rates we'll stop trying every trick in the book to avoid our taxes." Rational businesses as rational actors will spent $500 to make $550 every time. And the idea that if we just "simplify the code" --as if that's easy and magic and obvious -- companies won't keep looking for ways around paying taxes is uncharacteristically naive for you, Greg. It reminds me of those who promote a "simple, flat income tax," as though a simple tax is necessarily flat or a flat tax is necessarily simple.

GREG J REPLY -- Rational businesses will not spend $500 on tax services to save $550 in taxes (if only!). In fact, often they will not spend $500 on tax services to save $10,000 in taxes. Understanding why requires digging in to what is involved in the cost/benefit analysis. On the benefit side is the amount of taxes saved. On the cost side are such items as: (a) the cost of tax services; (b) management time to deal with the tax service provider; (c) the disruption/changes to business operations that all worthwhile tax planning ideas require; (d) the effect of business changes on customers; (e) time value of money; (f) risk that the strategy will be shut down by legislation, ... I could go on and on.

I conceded above that even if the tax rate is lowered, companies will seek to avoid paying taxes. However, it will become much more difficult to persuade them that the benefits of tax savings exceed the costs for the reasons I described above. Don't think for a second that a company like Motorola wants to employ a large internal tax department and pay for outside tax advisers. When the value of tax savings strategies decreases, the more likely it is that Motorola will find that it's not worth the opportunity cost to spend time and money on such strategies. It would be unrealistic to expect that by lowering the tax rate, all planning opportunities will fade out of existence - but it's quite naive to suggest that one can compare tax savings to the cost of advice without understanding how companies make these decisions in real life.

--ZORN REPLY -- If I actually believed that you were looking for the golden mean -- that level and style of taxation that balanced economic growth with the provision of safety nets and other services befitting a nation of our ideals and wealth, I might be with with you. I don't believe that, though. I've heard too many conservatives parrot the thought that they want to get government so small they can drown it in the bathtub. I happen to think a well managed government should be and even needs to be substantial in order to cushion the blows administered by the roller-coaster ride of free-market capitalism; that the conservative economic vision is, at the margins, dystopian.
No, the poor will not be better off if we leave it to business and industry to set all our standards for wages, workplace safety, the environment and so on.
On one of the threads today MCN was crowing about how much better the poor have it now than they did in 1911. No duh. This past century has been massively, heroically, strongly liberal and progressive by the standards of history. George Will has openly expressed the desire to drag this nation back to the early 20th century. I cannot join him in that desire.

GREG J REPLY -- I'm sure that we have fundamental differences about what the size of government should be but I agree that we need a safety net. I believe that the government should actually take a greater role in providing for citizens who have mental and physical disabilities. I also agree that there should be temporary relief in place for people who are having trouble making ends meet. I think that providing too much relief for able-bodied people creates a serious moral hazard problem, however. I'm also not sure why a person who can't find work in the Chicago area isn't required to demonstrate that he's looking for work in low unemployment states like Texas and Utah before he collects unemployment benefits, but that's probably more than we want to get into right now.

I'm not so sure that I agree with George Will that we want to drag this country back to the early 20th century (although there are some aspects of that period that we would do well to bring back). I would settle for capping the size of the federal government to some set level (e.g., 10% of GDP), reducing the number of departments, agencies, and regulations, and having more decisions made at the state and local level. I think that we could do all of that without seriously damaging our safety net but I know that it would be tough for us to agree on what the right size of the safety net is in the first place.

ZORN REPLY -- I'm a bit more economically conservative than perhaps my reputation would suggest, but you're probably right that we have significant differences in what the government should and shouldn't do. I see government as a protector and a promoter, that which does for the people that which individuals and the market cannot and will not do for them and guards us against one another, broadly speaking. I think it ought to have a major role in health care, education, environmental protection, transportation infrastructure, workplace safety, the guarantee of civil rights the enforcement of criminal justice, the eradication of starvation and grinding poverty, preservation of natural resources, sponsorship of the arts, national and domestic defense, and I'm sure a bunch of things I've forgotten as I ramble off the top of my head.

It's not for me so much what government does but that it tends to do what it does inefficiently. I sound like one of those "waste, fraud and abuse!" decrying Republicans and I don't want to overstate the amount of savings that flinty management could impose. But I do want a better bang for my buck.

I am surprised the "stimulus" folk are not calling for a more complex tax code as a way to increased employment of tax accountants and lawyers (who I've told, albeit couldn't verify myself, are people and consumers also). It would be one of the modern versions of Horace's tongue-in-cheek suggestion (borrowed from Henry Hazlitt's Economics In One Lesson) of breaking windows.

If I may also add, the idea of the private sector using resources perfectly efficiently and the public sector wasting them is straw-man unworthy of serious discussion. We should stipulate that not only there is everything ranging from stupidity and fraud in the private sector (albeit there are reasons to think, based on human nature and comparative disincentives, less than in the public sector), but in principle, there is always waste of resources at a level of a company and a time period. Waste of resources in the private sector known as losing money. There is hardly a business around that haven't had a period of losing money and probably the majority of companies that ever existed, that never made money and went of out business. This happens simply because no one has a crystal ball, business investment is done on spec. The best possible predictions, using all available information, of the future costs of production and of demand, hit the mark only once in a while. (I am sure all of you folk knew the success Microsoft, Amazon and Google would be and that Apple would rise from the ashes.) But the way information is disseminated and is dynamically used in the free market results in tremendously more winning investment decisions than a government technocrat, regardless of IQ and intentions or a politician can ever hope to achieve.

Greg, you write that the "maximum marginal economic contribution that could be made by a government worker is derived from his disposable income. When his disposable income comes entirely from taxpayer dollars, the cost will always exceed the benefit (that's just how the math works)."

I don't follow you here. It seems that you're conflating the budget and the economy, as though a dollar of government spending, on an employee at any rate, ipso facto produces a dollar's worth of economic drag. I'm not an economist -- neither are you -- but I don't think "that's just how the math works." If the money that is saved from firing that worker is not pumped into the economy where it can be fruitful and multiply, but rather used to reduce borrowing, then you lose the near-term stimulative effect of that employee's spending, which could threaten the recovery. http://money.usnews.com/money/careers/articles/2011/07/08/public-sector-job-cuts-threaten-recovery The whole idea of monetary policy (which you support) and fiscal stimulus (which you don't) is to slow an overheated economy and speed up a stalled one, which the government is in a position to do based on its status as a gigantic spender (fiscal) and borrower (monetary). The argument to be made, I believe, is that we can't afford to borrow more now. But I haven't seen the evidence for that. When interest rates are low and unemployment is high, it would seem an ideal time for fiscal stimulus and the wrong time for anti-stimulative measures, like massive near-term cuts in government spending or firing of government workers. The debt, of coruse, is a long-term problem that requires a long-term solution. And now *Democrats* are the ones who are pushing for big budget cuts ($4 trillion) over the next ten years, even as Republicans step away from that based on their Every-Rich-Person's-Dollar-Is-A-Precious-Flower position. And more short-term stimulus is not even on the table, even in exchange for long-term deficit and debt reduction. As this link puts it, discussing a note by Jan Hatzius, the Goldman Sachs chief economist, we can't all save at once and expect growth. http://pragcap.com/jan-hatzius-spending-cuts-threaten-recovery

Money borrowed (= real resources borrowed, not just pieces of paper) for one purpose is money (again, real resources) not used for another. Aside from the general inefficiency (error rate) of government investments relative to free market investments (see my post above), most of the government spending is towards raising consumption (again, I have to be repeating because the veil of money blinds so many, consumption is a reduction of real resources), not investment (use of resources to produce more resources in the future), it reduces the wealth of the nation. (And it is best not to listen to "economists" who work for companies that benefit from government spending and manipulation of currency.)

P.S.
I don't think it would be inappropriate to say that advocates of "stimulus" want to eat the cake and have it too.

Any recession reflects the loss of a lot of real resources on a lot of bad investments, not just restatement of numbers in balance sheets (in this case, bad investments encouraged by the Fed's expansive monetary policy and the Congress's mandate to increase home ownership). If your house just burned down and you don't have insurance, if you want it back, you have no choice but to start saving, consuming less, putting away more. You can't spend your way out of a loss.

I think that Boris addressed your questions, and as usual did a much better job than I could have (B.A. in Economics and M.B.A., but not a practicing economist), but let me add a few points.

An inefficient investment, e.g., a government employee, is not going to have a stimulative effect on the economy no matter how much he spends. If that were the case, we'd have the government employ anyone who couldn't find a job and assign them meaningless tasks (see, e.g., the old ditch digger fallacy). That's no different than a massive expansion of welfare. Again, the math doesn't work there and I think you're not grasping the idea of how reducing expenditures by an employee's salary affects the macroeconomy. As Boris points out, it allows the savings to be redeployed elsewhere, which is net beneficial (even if it is used to reduce borrowing) as long as it doesn't go toward other inefficient investments (in which case the effect is neutral). I think that you are biased toward spending over saving, which may seem intuitively appealing to a layman, but is not economically rational.

One can't be for or against monetary policy or fiscal policy - they simply exist. One can be for a certain type of monetary policy or fiscal policy though. I don't mean to pick on you but borrowing is actually part of fiscal policy and not really a monetary policy (monetary policy has more to do with the supply of money in the overall economy and not the government's balance sheet).

Your claim that there is no evidence that we can't afford to borrow more is interesting given that the national debt per capita is about $46,000. As I asked in an earlier thread, would you care to spot me? I don't think you appreciate the importance of debt as a balance sheet item or the idea that our macroeconomy can be thought of as a combination of everyone's balance sheets - including the government's.

You are right that the economy needs to be stimulated but can you explain how it is more economically beneficial for the government to spend money compared to freeing up more private capital (e.g., through tax cuts), especially when we are at the point where we need to raise the debt ceiling? In other words, I'm at a complete loss in trying to understand how it's better for the government to spend money it doesn't have and further crowding out private investment rather than simply promoting private investment.

Yes, debt is a long-term problem that requires a long-term solution but the Democrats can't even get on board with a short-term solution. If you can't commit to cutting the low-hanging fruit, how can you be trusted to mitigate overspending and reduce debt levels over time? Also, the "short-term stimulus" you refer to is actually tax increases. So not only are you not interested in promoting private investment but you are actually advocating reducing it through taxes and crowding it out even further through more government spending, which is responsible for this mess in the first place. I don't get it.

"ZORN REPLY -- I'm a bit more economically conservative than perhaps my reputation would suggest, but you're probably right that we have significant differences in what the government should and shouldn't do. I see government as a protector and a promoter, that which does for the people that which individuals and the market cannot and will not do for them and guards us against one another, broadly speaking. I think it ought to have a major role in health care, education, environmental protection, transportation infrastructure, workplace safety, the guarantee of civil rights the enforcement of criminal justice, the eradication of starvation and grinding poverty, preservation of natural resources, sponsorship of the arts, national and domestic defense, and I'm sure a bunch of things I've forgotten as I ramble off the top of my head."

Great, but where are you when discussion turns to dealing with the absurd contracts we have with government workers, with how these contracts, handed out in chicago and Cook County, seem to be mostly about paying workers for not working rather than being productive? I don't mean nibbling at some of the details, but taking on the hugely excessive labor costs we have to pay for services that we all expect of government? Absenteeism, featherbedding (three men on a garbage truck--really?) The current pension system that will bring ruin in the next decade (see that little 1-square mile town in Rhode Island to see what is going to visit larger places that have made untenable promises; the math is catching up around the country):

I keep waiting for liberals to actually confront the worshipped concept of "collective bargaining" and how it affects the cost of government. Government needs to be a protector, but especially with our post-9/11 devotion to first responders, we seem to have no limits in what we will give to police and firefighters unions (folks, before you tell me they are the only people with dangerous jobs, please look up the statistics on many other common professions, like fishing, farming, and trucking; you might be surprised). Cleveland just graduated a new class of police recruits and then fired them all because there is no money to pay them. As usual, the union is recalcitrant about adjusting to new fiscal realities in bleeding cities like Cleveland. Contracts with first responders have become so onerous that early retirement pensions, inflated disability claims, and lavish healthcare benefits devour the money that could put cops on the street. There is no shortage of highly qualified people who would like to be officers. When will the left start insisting that the government it so loves as an employer be well managed and aligned with new economic realities that the rest of us deal with?

Make the tax code simpler and more sensible and the collections will be a lot easier and complete. For example, double taxation of corporate profits - first when they are made, then again when they are paid as dividends - makes no economic sense and creates incentives for corporate management to seek shelters and tricks. Why does it make no economic sense? Because what is not distributed by definition is re-invested. Now, why would you want to tax re-investment? What is distributed can be wholly taxed at the investor level, at rates appropriate to the total income of that investor. The current mechanism is actually punishing the investors with the smallest total income.

I dare them. Every time they write rules to try to shut down offshore tax planning at least two things happen: (1) they close one door on overseas planning and inadvertently open up others and, even worse; (2) they make us less globally competitive (by hurting U.S. companies with legitimate overseas operations, by hurting foreign companies located in the U.S. and by raising tax compliance costs). Oh yeah, they also make my firm a bunch of money because remember what I wrote about the costs/benefits of tax planning? This type of legislation raises both but management is encouraged to go after the benefit because they are evaluated and rewarded or punished based on how they manage the corporate effective tax rate (ETR); it's all about the ETR for them.

As I wrote earlier, I'm all for closing loopholes but you need to do it without raising the incentives for finding others. Cut the rate and you reduce incentives for the really aggressive tax planning (i.e., the only type that the government actually should discourage), increase our competitiveness, and encourage foreign companies to set up shop here rather than the other way around.

2. Environmental protection of common resources with no mechanism yet invented to assign ownership makes sense as well.

3. Subsidies directed towards reducing the chances of someone becoming a destructive member of the society (let's face it, that's typically the opposite of being a contributing member), to the extend they prove to achieve that goal cost effectively, make sense These would include food, shelter, transportation, healthcare and education subsidies - maybe even just general level subsidy. But why should the government be in the business of running education or healthcare?

4. Transportation infrastructure? Is private industry not capable of building airports? Oh, wait, perhaps antitrust laws (which stem from whole bunch of economic fallacies) would keep airlines from creating consortium to build airports. Whatever infrastructure is hard to have owned privately (not that much falls into that category), ought to be financed by user fees.

5. Worker safely regulation? Sort of presumes some people guilty and assumes others are morons and don't understand or care to know risks. Yes, we ought to punish those who endanger others, and that includes those who put workers in dangerous situations intentionally or through negligence without fully revealing the dangers, just as we punish reckless drivers. But don't we already have a legal concept of endangerment? I propose taxpayer safety regulations: anyone running for office must prove to have sufficient IQ, common sense, general knowledge of history and sciences, grasp of economic principles, have a physiological profile of an honest person, etc., in other words, be licensed to capably represent interests of others. If we are going to continue to license doctors and lawyers; and "license" work-place safety, all under the presumption that the consumers or the workers inferior beings and need to be mothered, why not license politicians? The scale, scope and duration of possible damage politicians can inflict is way bigger than a nuclear plant meltdown.

... And perhaps we ought to an equivalent of an FDA overseeing proposed governmental programs, particularly treatments of economic and social ills: first prove scientifically that they will not cause harm, and, to claim effectiveness, prove incremental positive impact

I suppose as long as corporations hire the smarter lawyers, the people you work for have nothing to worry about? No wonder conservatives support the less than intelligent candidates, you guys profit from a dumbed down government.

Sort of but it's not quite that simple. The point I'm making is that we can always find a way around new tax legislation because when they shut down one method of planning something else always opens up (to explain why this happens would involve a lengthy explanation but just trust me for a sec.). It doesn't really have to do with how smart the legislators are but rather with how convoluted the tax code has become.

But you need to go back to the point I made about new restrictive legislation raising both the costs and benefits of tax planning. These companies can profit from new tax planning ideas but they may cost more to implement and be more disruptive to the business.

The choice becomes this: (a) lower the rate and have companies focus more on their business than tax planning or (b) impose new restrictions on tax planning and have companies place an even greater focus on tax planning. As always, beware the law of unintended consequences.

Most plans can be properly evaluated by accelerating their long-term impact to an extreme situation. With the government becoming the primary source of employment, let's move forward to a point where every American citizen is employed by the federal or a state government. Each employee of these governments conceivably would share the many firm entitlements that government employees own (i.e. collective bargaining, guaranteed benefits and retirement, and fairly fixed employment status). I can't imagine how our country would thrive under such a model.

So, would any of you supporters of the current government as employer model have any thoughts on the following:

(1) Is there a point where there are too many government jobs?
(2) Do you prefer to have all employment and wages be directly managed by the US or state governments?

About "Change of Subject."

"Change of Subject" by Chicago Tribune op-ed columnist Eric Zorn contains observations, reports, tips, referrals and tirades, though not necessarily in that order. Links will tend to expire, so seize the day. For an archive of Zorn's latest Tribune columns click here. An explanation of the title of this blog is here. If you have other questions, suggestions or comments, send e-mail to ericzorn at gmail.com.
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Contributing editor Jessica Reynolds is a 2012 graduate of Loyola University Chicago and is the coordinator of the Tribune's editorial board. She can be reached at jreynolds at tribune.com.